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Competition is healthy,a fast profit even better

It's not about where the umpire moves the goalposts - it's about the compensation that gets provided for it. And it seems that Telstra shareholders understand this concept.

It's not about where the umpire moves the goalposts - it's about the compensation that gets provided for it. And it seems that Telstra shareholders understand this concept.

Yesterday they voted overwhelmingly in favour of accepting the government's $11 billion make-good package for blowing up their copper wire wholesale business.

The shareholders correctly swallowed the Telstra board's view that taking the compensation was better than competing with the government's National Broadband Network. A compete scenario would result in both Telstra and NBN being losers. Ultimately shareholders understood that the risks contained in staging a fight were too great. They voted in favour of the least worst case.

According to Telstra's independent experts, co-operating with the government will make shareholders $4.7 billion richer. But the real information that the Telstra board was not prepared to discuss is where shareholders would land (financially) if a Coalition government takes office in two years and embarks on a new telecoms strategy. The Telstra chairman, Catherine Livingstone, acknowledged yesterday that the telco's wholesale and retail operations would still be structurally separated under a Coalition policy.

The Coalition's spokesman for communications, Malcolm Turnbull, has announced the NBN rollout would be ceased but existing fibre would be retained. It's certainly a cheaper option to build. It may not provide the same level of network speed or capacity but it should be less expensive for the consumer.

NBN is the Rolls-Royce of networks and could serve as testament to government profligacy. The opposition reckons that its alternative will be enough to keep the community satisfied, but that is not guaranteed and experts vary widely on the issue.

The important difference is that the Coalition's plan calls for Telstra to retain its copper wholesale network and hybrid fibre coax network and a monopoly on what is called the "last mile" - the wires that connect to individual homes. The Turnbull plan would require Telstra's separated wholesale business to upgrade its network and boost internet speed and coverage. This plan would involve a suite of technologies including more wireless and satellite.

Given that the Coalition policy is not yet fully formed, it is difficult to value from Telstra's perspective. However, the independent investment and advisory group, Grant Samuel, takes the view that the Coalition plan would clearly be more favourable to Telstra shareholders. In a sense this represents the blue sky for Telstra.

If the Coalition wins and halts the NBN build, shareholders will lose the $11 billion coming their way - and under this scenario the board may be less inclined to make good on its promise for some kind of capital management program.

There will be some kind of compensation. Telstra will still get the rent from the parts of its infrastructure used by NBN.

Telstra takes the view (but won't articulate it much) that having the Coalition in government and being able to milk the declining copper wholesale network is a better bet for shareholders. This network is still a cash cow with generous margins.

It also knows that this option is not on the table at this stage and thus it is safer to co-operate with the government and NBN, and hope that it gets the upside of playing ball - like access to new spectrum - while living in hope that NBN, like the present government, is ultimately orphaned.

Meanwhile, the proposed deal is not yet quite done. Telstra still needs to reach an agreement with the Australian Competition and Consumer Commission, which should be forthcoming.

For NBN, it is business as usual - announcing where it will go next with its state of the art network roll-out. Based on the present schedule it will be about 10 per cent complete by the time the next federal election takes place.

While the Telstra shareholder vote in favour was overwhelming, it was probably not the main reason the company's share price reacted so favourably yesterday. The market was factoring in a yes vote as several large shareholders had indicated they were in favour and the small shareholders had been well herded by the board to comply.

Rather, the big news was that the improvements in operating performance outlined by Telstra's chief executive, David Thodey, a few months back were continuing and, better yet, the company announced its 28? dividend would be paid in 2013 - subject to there not be any catastrophes. This makes Telstra a particularly attractive yield stock. The underpinning of the dividend will go a long way to providing a floor for the share price despite the equity market uncertainties.

There are plenty of other stocks offering similar yields to Telstra but none that have articulated a dividend for two years with this degree of certainty. Some of the others may well lower their payouts if earnings are softer. The Telstra board had indicated it would pay 28? in 2012 - which is the reason the shares have performed relatively well over the past couple of months.

None of this goes far by way of compensation for all those shareholders who took up stock in the various government sell-downs. Nor does it address concerns held by many small shareholders that they were duped by the government that sold the company and then set up a competing network.

Plenty of them were at yesterday's meeting. But they were voicing their dissatisfaction with the government rather than the board.

The author holds shares in Telstra


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